It cannot get tougher than this. With global markets melting and every asset class straining, wealth managers are facing an uneasy task of managing HNIs’ wealth. In such circumstances, Manoj Shenoy, CEO, EFG Wealth Management India, the Indian arm of Switzerland-based multi-billion dollar EFG Group, a specialist in global wealth management, details to Raghuvir Badrinath, the discussions they are having with their HNI clients on managing their wealth. Edited excerpts:
What are the major shifts wealth managers, a focused one like yours, are seeing today, compared to the one during 2008? And how are HNIs discussing options with you on getting good returns?
We assess that the present market backdrop is starkly different from the doomsday scenario of 2008. Moreover, post the global financial crisis, the relative resilience of many EM (emerging markets) economies, in general, and India, in particular, has led to increased investor faith in these economies/markets.
Unlike 2007-08 when foreign investors were extremely gung-ho on the Indian market (decoupling argument), this time the level of excitement is limited. While, flows into equities in the last two years have remained satisfactory, year till date flows in 2011 has remained subdued suggesting lesser exuberance of FIIs towards Indian equities. Similarly, exuberance from the domestic investors both retail and institutions is now stark in contrast with the 2008 levels. Indian institutions have seen negative inflows over the last two years and therefore it can be deduced that the animal spirit among Indian investors are running at low levels.
Earnings growth expectations are far more reasonable than what it was in 2007-08. Similarly, valuations are far more reasonable. The overall health of corporate India is better than that in 2008. Indian market is trading at 13.7x 1 year forward P/E ratio as compared to 24x in FY07-08. India’s broad market is far cheaper. Indian small cap index is trading at Rs 7x 1 year forward P/E versus over 13x in FY07-08. Indeed, the Indian market is trading at well below average multiples compared to its history as well as of its peers.
Given such a delicate situation, how should one approach the equity markets?
Cyclically, inflation should start tapering off to some extent soon while interest rates might start falling after a few months. For a structural improvement, the country needs to boost the investment cycle. In the long term, we need strong manufacturing policies to boost exports like what has been done in other emerging markets. Only then can concerns be structurally addressed. On the positive side, given the sharp underperformance against other emerging markets, the moderate valuations and the expected cyclical reduction in inflation and interest rates, we might see markets consolidate. The volatility driven by the Eurozone will of course be the most important driver in the immediate term.
The ideal advice in these times is to go in for sovereign bonds — but with many a sovereign bond shaky today — how should one place ones bet at this valuable instrument?
In the present uncertain environment, no investment instrument is 100 per cent safe. The AAA bubble was one reason why risk was not priced correctly. What happened subsequently was a rude wake up call for many global banks as securities that once seemed safe bets turned out duds. The banks are now getting a second shock. It is now increasingly clear the sovereign bonds issued by governments are not that safe either. The fiscal crisis in Greece, Italy and some other European countries is a reminder even government debt comes with certain risks. The best credit rating should be available only to the strongest issuers, be they corporate or sovereign. Only 16 of the 131 governments rated by Standard and Poor’s now have an AAA rating.
In terms of corporate bond curves, what is the best bet between short-term income plans compared to the medium term income & dynamic bond funds and fixed maturity plans?
We believe short-end rates have peaked in March 2011 and the yield curve would incrementally steepen. The basis for this is that apart from expected rate hikes and system liquidity deficit, a major trigger for short end rates to rise was a sharp rise in the credit to deposit ratio of banks in the last quarter of calendar year 2010. Owing to higher deposit rates since January - March quarter, credit to deposit ratios had stabilised in that quarter and is expected to fall subsequently.
This would protect short-end rates from rising much further despite incremental rate hikes from the RBI. Hence, the ‘front end’ of the corporate bond curve (1-3 years) was favoured and accordingly have been recommending short-term fund since March 2011. In line with expectation, the yield curve has incrementally steepened.
Thus, while the curve was inverted in March, it is almost flat now. This process is likely to continue as RBI is likely to pause on rates and credit demand continues to slow relative to deposit growth.